Suitability Letter Generator The letter has been initial personalised to the clients circumstances utilising the user interface on the online software as demonstrated below, where further personalisation is required this is highlighted yellow in the letter for speed and ease of use. The letter comes in 2 distinct parts the main body containing the recommendation and an appendix which in this instance is written as FAQ’s, some firm provide the FAQ’s as a precursor to a meeting or as a reminder of the discussions Financial Report For Mr A Client Produced DD/MM/YYYY By Mr A Adviser Bankhall Staff Member The Southmark Building Barrington Road Altrincham Greater Manchester WA14 1GY Telephone 0161 941 6076 Fax 000 E mail Further to our recent discussions, I have provided a summary of your current situation, your goals and needs as I understand them and my recommendations in order to meet these. As part of the process I have considered all of the information you have provided to me. If any of the details below are incorrect, or if your circumstances have changed, please let me know as this may affect my recommendation. Your current situation Personal details: • You are a XXXXX aged XX. • You are in XXXX health. • You are married/unmarried/divorced/widowed. • Your husband/wife (if applicable) is age XX. • You have X children who are/are not dependent / you have no children. The current annual household income is £XXXX and your current annual expenditure is £XXXX. This leaves you with an annual surplus/ deficit of £XXXX Attitude to risk We have discussed and agreed that your overall attitude to risk is XXXXXX. This means that XXXXXX. Reference should ideally be made to how the ATR was arrived at, the client's capacity for loss and how this fits in with the client's goals and needs Emergency Fund When considering any form of financial planning, a key area to consider is having sufficient monies for emergencies. When considering this we agreed that you should have/ should be building up to a minimum reserve of £xxxx for such circumstances. Will You have not made a will and I strongly advise you to do so. Should you die without having made a will then you will be deemed to have died 'intestate' and your estate will be distributed in accordance with the intestacy rules. This will mean that your assets will not necessarily pass to the people whom you would want to benefit (or, if so, not necessarily in the proportions you would wish) and, in addition, your estate may not be distributed in the most tax efficient manner. Your Objectives You are concerned about your beneficiaries having to pay Inheritance Tax on the value of your estate and requested advice on ways to reduce or provide funds for your beneficiaries to meet this liability in the event of your death. Summary of current IHT position I have outlined brief details below of the potential Inheritance Tax that could be payable on death should you die tomorrow. As you have made gifts during the last 7 years these would become assessable to inheritance first and thus use some or all of the nil rate band that would usually be available to set against your estate in full - I have provided a summary below of the amount of nil rate band used up by this gifts and, where applicable, any IHT due on these transfers. Lifetime Transfers Gifts by XXXX Gifts by XXXX £XXXX £XXXX Available Nil Rate Band £XXXX £XXXX Amount subject to IHT £XXXX £XXXX IHT (40%) £XXXX £XXXX Nil Rate Band remaining £XXXX £XXXX Gifts made in last 7 years Less Residual Estate Based on above their would be £XXXX of the nil rate band remaining to set against your estate - The table below shows the IHT that could be therefore be due depending on who died first and the subsequent liability on the death of the survivor. If XXXX died first If XXXX died first £XXXX £XXXX Liabilities £XXXX £XXXX Assets left to spouse £XXXX £XXXX Available Nil Rate Band £XXXX £XXXX Net taxable estate £XXXX £XXXX IHT on 1st death £XXXX £XXXX Spouse assets (including those inherited from 1st to die) £XXXX £XXXX Liabilities £XXXX £XXXX Spouses Available Nil Rate Band £XXXX £XXXX Net taxable estate £XXXX £XXXX IHT on spouses 2nd death £XXXX £XXXX Assets less less A detailed explanation of my recommendations has been provided below but I have first summarised what your position would be in respect of your liability to IHT should you put into effect my recommendations:- XXXX This of course makes the assumption that the value of your estate remains unchanged whereas, in reality, your assets are likely to increase in value. It is essential therefore that we meet for regular reviews in order to monitor the situation and so that any further steps can be taken if necessary. Alternatives - Whole-of-Life Assurance Perhaps the most straightforward method of mitigating the effects of Inheritance Tax is to set up a suitable life assurance policy in trust to provide your beneficiaries with the funds required to meet the IHT due on your death. My research demonstrated that a single life/joint life, last death (delete as appropriate) whole-of life policy written on a 'balanced'/guaranteed premium (delete as appropriate) basis with a sum assured of £XXXXXX (equivalent to the potential IHT liability identified) would cost £XX per month. I have not recommmended this solution because XXXX Alternatives - Lump Sum IHT planning There are other methods of reducing the value of your estate and we discussed the following lumpsum IHT solutions that were equally viable based on your circumstances:XXXXXX The reason(s) I did not recommend the solution(s) detailed above was/were XXXX. Recommendations Discounted Gift Trust During our discussions I identified that you also have a requirement for monthly income of £XXXX. I have therefore recommended that you/XXXX invest £XXXX into an investment bond written under a Discounted Gift Trust arrangement which will provide monthly/quarterly/annual income (delete as appropriate) of £XXXX and immediately reduce your IHT liability. I have recommended the arrangement be written with you as sole settlor/yourself and your wife as joint settlors (delete as appropriate) because XXXX. When effecting this type of arrangement, under the terms of the trust you reserve a right to certain future payments for the rest of your life whilst making a gift of the balance into trust for your chosen beneficiaries - The 'notional' value of benefits you have retained is calculated actuarially (based on the applicants age, gender, and state of health). The difference between the amount invested and the value of retained rights (the 'discount') is the amount that is deemed to have been gifted away. The value of your estate is reduced immediately by the value of the 'discount' which for a male/female/couple (delete as appropriate) is estimated to be around £XXXX based on the investment of £XXXX recommended. There will be no IHT for your beneficiaries to pay in respect of the gifted element provided you survive for 7 years. In choosing a suitable product/provider I have taken the following factors into consideration when researching the market:XXXXX Based on the above criteria I have recommended a Discounted Gift Trust scheme be effected with XXXX (insert name of provider) because XXXX. The investment policy underpinning the arrangement is a XXXX and I provided details below of the contract recommended. Provider XXXX Product XXXX Investment Amount XXXX Allocation Rate XXXX Early Surrender Penalties XXXX We identified your attitude to risk in respect of investments as XXXX and I have therefore recommended the investment be split between the following asset classes in the following proportions:Sector Percentage Split Cash XX% Government Bonds/Gilts XX% Corporate Bonds XX% UK Equity XX% Overseas Equity XX% Property XX% Other XX% Based on the above asset allocation model I have therefore recommended your investment be split amongst the following funds; Fund % Amount (£) XXXX XXXX £XXXX I have recommended the arrangement be underwritten by the insurer. Following underwriting the discount could be revised to a lower amount if there are any health issues to consider. I have recommended the Discounted Gift Trust arrangement be based around a bare/flexible/discretionary (delete as appropriate) because XXXX. The discounted gift, to the extent it exceeds the annual gift exemption, will be a potentially exempt transfer/chargeable lifetime transfer (delete as appropriate). It is important that you spend the 'income' that is received from the Discounted Gift Trust otherwise this will simply build up within your estate and reduce the tax efficiency of the arrangement. You should also be aware that your only entitlements will be to the regular payments you have reserved for yourself. These payments will continue for the rest of your life or, in the event of sustained poor investment performance, until the value of the investment has been exhausted. It is important to be aware that the value of the discount is an estimate and could be challenged by HM Revenue and Customs (HMRC) on death, however HMRC generally accept the validity of figures calculated at outset where the arrangement has been fully underwritten. Payment for services We agreed on the basis that I will be remunerated at outset, details of which were provided in the appropriate documentation. We supplied the following documents to you on XX/XX/XX • Client Agreement • Disclosure Document (Key Facts about our services and costs) • My business card. When providing our advice, we have relied on the information you have provided to us during the information gathering process. If you feel this information is not a true reflection of your situation, then please let us know as this may affect the recommendations made. We are authorised and regulated by the Financial Services Authority, as detailed in the Disclosure Document / Client Agreement letter. We would particularly draw your attention to the information concerning charges, cancellation and risk contained in the documentation provided. As the Disclosure Document / Client Agreement letter explains, you may be entitled to take your complaint to the Financial Ombudsman Service Please note that in all our dealings with you, we will treat you as a Retail / Professional client. If we have categorised you as a professional client, then you will lose certain protections provided for retail clients, details of which we have previously provided to you. You may also have full rights to the Financial Services Compensation Scheme (FSCS). The FSCS provides compensation should your chosen provider become insolvent and be unable to honour a claim under your policy. The levels of compensation vary depending on the type of contract concerned. The Key Features Document/Plan Literature, which I have explained to you, provides a great deal of information concerning the terms under which this policy has been issued. You should read this document carefully and contact me if you have any queries concerning it. I would like to draw your particular attention to the sections on charges and cancellation. Signed............................................... Dated................. Adviser's name I confirm that I have received and have had the contents of this report explained to me including its importance Signed............................................... Dated................. Client's name Appendices Appendix I - Inheritance Tax FAQ This aim of this document is to answer the most frequently asked questions in respect of Inheritance Tax and should be read in conjunction with the suitability report which summarises the recommendations your Financial Adviser has made based on your individual circumstances. It should not be viewed as an exhaustive summary of what can be a complex area of taxation You should always seek guidance from your Financial Adviser. Q1. How is Inheritance Tax charged Inheritance tax becomes payable where the value of the deceased's estate exceeds the 'nil rate band' (i.e. - the band at which IHT is charged at 0%) - The amount in excess of the nil rate band is subject to IHT at a rate of 40%. You must also first add in gifts that the deceased made in the 7 years prior to death when calculating IHT (although some may be exempt and do not have to be included) - See Question 2 If the value of the deceased's estate is below the nil rate band no inheritance tax will be due on it. In addition, there may be exempt gifts left by way of will or intestacy that do not need to be included The most common type of exempt gifts are those between spouses. The nil rate band for the tax years 2009/10 to 2014/15 inclusive is £325,000. Where the deceased individual is a widow or widower then, where the second death occurs on or after 9 October 2007, their personal representatives may be able to claim an amount of the nil rate band that was unused by their husband/wife. Example Arthur died on 6 April 2011 (tax year 2011/12) and had assets of £750,000. His wife, Vera, died in a previous year on 10 June 2007 (tax year 2007/08) with assets of £400,000, which her Will had split 50/50 between Arthur and their son David. IHT on Arthur's estate would be calculated as follows Step 1 - Calculate Nil rate band (NRB) unused on Vera's death Estate Less Gift to Arthur (exempt) £400,000 Amount assessable to IHT Nil Rate Band for 2007/8 Nil Rate Band unused (£300,000 - £200,000/£300,000) £200,000 £300,000 1/3rd £200,000 Step 2 - Calculate IHT due on Arthur's estate Estate Less £750,000 Nil Rate Band for 2011/12 plus Spouses unused nil rate band (£325,000 x 1/3rd) Total Nil Rate Band Available £325,000 £108,333 £433,333 IHT due (£750,000 - £433,333 x 40%) £126,667 Q2. How are lifetime gifts treated for Inheritance Tax? On death there may be IHT payable on any lifetime gifts the deceased made (that are not exempt gifts) during the previous 7 years. These gifts are assessed to IHT before the residual estate and therefore will use up the nil rate band first Where the nil rate band has been fully exhausted any excess is charged to IHT at 40% although only a proportion of the tax may be payable if the gift was made more than 3 years before death Certain types of gifts made during lifetime may also attract an immediate liability to IHT at the time the gift is made. Please see Question 5 Where, however, IHT is payable on a lifetime gift and the gift was made more than 3 years before death, the taper relief is applied on a sliding scale as follows: Years elapsed since gift Percentage of IHT payable 0 to 3 years 100% 3 to 4 years 80% 4 to 5 years 60% 5 to 6 years 40% 6 to 7 years 20% Q3. What types of gifts are exempt from IHT? Lifetime Gifts Only Gifts of up to £3,000 in total - known as the annual gift exemption - can be made each year and will be immediately exempt from IHT. If the £3,000 annual exemption is not used (or only partially used) then any unused amount can be carried forward for one year only. In addition individuals can make small gifts of up to £250 per recipient which are exempt (although this exemption cannot be combined with the annual gift exemption of £3,000 for example to make an exempt gift of £3,250 to one individual). Regular gifts from income (not capital) may also be exempt from IHT provided that they are habitual and do not affect the donors standard of living Other gifts which are exempt are:• Gifts to UK registered charities • Gifts to Political Parties • Gifts for National Purposes • Gifts made to a person who is about to get married/enter into a Civil Partnership up to the following amounts o £5,000 if made by their parent o £2,500 if made by their Grandparent o £1,000 if made by anyone else Q4. Who is liable for the IHT on death? The personal representatives are liable for any IHT due on the deceased's estate. In respect of any IHT due on lifetime gifts made to an individual then it is the recipient who is liable. In respect of any IHT due on lifetime gifts made to trust then the liability for the IHT usually lies with the trustees (although they would meet this from the trust assets). Q5. What is a Chargeable Lifetime Transfer? Certain lifetime gifts may attract an immediate IHT charge - The most common example of a Chargeable Lifetime Transfer is a gift to a trust (with the exception of gifts to absolute/bare trusts) and, less commonly, gifts to 'close companies' (generally defined as a company which is under the control of five or fewer participators, or of participators who are directors) Chargeable Lifetime Transfers (CLTs) are cumulated over a 7 year period and, if the cumulative total of CLTs exceeds the nil rate band (£325,000 from 2009/10 to 2014/15 inclusive) then the excess will be chargeable to IHT at the lifetime rate of 20% (equivalent to half the death rate). If death occurs within 7 years of a CLT then further IHT at the death rate of 40% may be due (see Question 2), although any tax already paid at the time of the gift is taken into account. Chargeable Lifetime Transfers may also need to be reported to HM Revenue and Customs where certain thresholds are exceeded. (a) For Chargeable Lifetime Transfers of cash or shares If the transfer plus CLTs made in the previous 7 years add up to more than the Nil Rate Band. (b) For Chargeable Lifetime Transfers of other assets Two conditions must be satisfied. Firstly, the transfer plus CLTs made in the previous 7 years must add up to more than 80% of the nil rate band, and secondly the value of the CLT must be more than the nil rate band minus the previous 7 years CLTs. e.g.:- John makes a CLT of £80,000 in 2011/12 and CLTs in the previous 7 years total £95,000. The total of £175,00 is less than 80% of the nil rate band (£325,000 x 80% = £260,000). The CLT of £80,000 is also less than the nil rate band minus the previous 7 years CLTs (£325,000 £95,000 = £230,000). Q6. What is a Potentially Exempt Transfer? A potentially exempt transfer (or PET) is a lifetime transfer which is neither an exempt transfer nor a chargeable lifetime transfer - These will generally be gifts made directly to another individual (i.e. - not to a trust). Provided the transferor survives for 7 years the gift will then be exempt from IHT, otherwise the gift becomes a chargeable transfer and will be assesed to IHT. Question 2 briefly explains how IHT is then calculated on gifts that the deceased has not survived by 7 years. Q7. What assets are included in my estate for Inheritance Tax Purposes? Simply speaking everything you own, debts owed to you, and certain trusts under which you are entitled to benefit will all form part of your estate when assessing whether or not it exceeds the nil rate band. From 22 March 2006, a person's estate is made up of:• Assets in the sole name of the deceased • Their share of any jointly owned assets (although their share may depend on the amount they contributed to it - not just how the current ownership of the asset is split) • assets held in certain trusts under which the deceased held certain interests:- These include immediate post-death interests (IPDI), a disabled person's interest (DPI), or a transitional serial interest (TSI) - See Appendix II for an explanation of these terms and trusts in general • Any ''nominate'' assets (assets which do not pass under the deceased's will or under intestacy but are transferred directly to beneficiaries due to a nomination made at outset) • Any assets gifted away but subject to a reservation of benefit (Gifts with Reservation) • the value of an alternatively secured pension fund (ASP) from which the deceased benefited as the original scheme member, or as a dependant who received benefits from the left over ASP fund of an original scheme member. The total of all these assets is then added to the chargeable value of any gifts made within 7 years of the death to work out the amount on which tax is charged. Some assets, although included in the estate, may have their value reduced for IHT purposes. Examples are assets qualifying for Business Property Relief or Agricultural Property Relief Additionally, if the deceased is non-UK domiciled for the purpose of IHT then only assets situated in the UK will be subject to Inheritance Tax - Assets situated overseas will be excluded property for IHT purposes. For individuals who are or are deemed to be UK domiciled for IHT purposes their estate will comprise all of their assets (whether situated in the UK or overseas). Q8. What do you mean by "domicile" and how do I know if I am UK domiciled for Inheritance Tax purposes? This can be a subjective area but generally a person's domicile is the country in which they have their permanent home and, when they are absent, to which they always intend to return. A person's "domicile of origin" will usually be inherited from their father, wherever the child is born and although steps can be take to acquire a different "domicile of choice" robust evidence is required to demonstrate this. For inheritance tax purposes a person who is non-UK domiciled will be deemed to be domiciled in the UK for IHT purposes if they have lived here for 17 out of the last 20 years - This applies even if they have not taken steps to acquire a domicile of choice here. Q9. What happens if I have not made a Will? A person is deemed to have died 'intestate' if they have not made a will - Where a will has been made but some element of it is invalid it is possible to have died 'partially intestate' There are established rules that govern how a deceased individual's estate is distributed in the event of intestacy. The rules for England and Wales, Scotland, and Northern Ireland are all different and it is the rules applicable to the country in which you are domiciled which apply. It is important to be aware that if you die intestate then your estate may not be distributed to the people whom you wanted to benefit and may be distributed in a manner that is not the most taxefficient. For full details of the intestacy rules please see Appendix IV. Q10. Will all my assets pass under the terms of my Will? Not necessarily. Where you own assets jointly with another individual (for example your home) your share in that asset may pass automatically to the surviving owner regardless of what your will states. These rules are known as the rules of survivorship. In addition, any assets you have gifted into a trust are no longer owned by you and therefore cannot be willed. They will be held by the trustees, under the terms of the trust, for the nominated beneficiaries. Q11. What is a 'Gift with Reservation'? A 'Gift with Reservation' (GWR) is a gift made by an individual who retains some benefit in the property or asset given away. In order to avoid a GWR the donor (the person making the gift) must be 'entirely excluded or virtually entirely excluded' from benefitting from what they have given away. For example, if a parent gifts their home (say, to their son or daughter) but continues to reside in it rent free then its value will still form part of the parents estate for IHT purposes on death even though legally they no longer own it. More complex series of transactions can also be caught as HM Revenue and Customs can argue there have been 'associated operations'. For example, if a parent gifts cash to their son or daughter who immediately use this to buy a main residence for the parent (donor) to live in, the value of the property could still be included in the donors estate on death. Q12. What is Business Property Relief and what assets qualify for this relief? If you own a business or share of a business its value, although included in your estate, may be reduced to nil under Business Property Relief provisions. This effectively means that your business can be left to your chosen beneficiaries free of inheritance tax. There are rules which restrict this relief to 'trading businesses' so businesses which deal wholly or mainly in land or buildings, investments, or securities will not qualify for the relief. For example, a property letting business which would be viewed as an investment rather than a trade. Business Property Relief is a complex and subjective area and you may need to consult a specialist tax adviser before relying on the availability of this relief. It is also important to note that whether or not the relief applies will be decided by HM Revenue and Customs based on the circumstances of the case at the date of your death. There is also no guarantee that there will not be legislative changes in the future which affect or even abolish the availability of this relief. Q13. Would any Inheritance Tax be due on any pensions which, at death, remained unvested? The death benefits from stakeholder pensions, personal pensions and occupational pension schemes will usually be written under trust. Should you die before taking benefits from these schemes the death benefits should be paid free of inheritance tax provided the Trustees/scheme administrator have discretion over who they pay the proceeds to and that they make the payment within 2 years of death. You should ensure that an 'Expression of Wishes' form has been completed confirming whom you would like the payment to be made. Failure to leave such guidance to the scheme could mean that they simply take the decision to pay any death benefits to your estate and therefore the proceeds could then be subject to inheritance tax. Separate trusts usually have to be set up in respect of Section 32 buy-out plans and Retirement Annuity Contracts (RAC) to ensure the death benefits are not paid to the deceased's estate and potentially subject to IHT • 'Section 32' buyout plans were first introduced in 1981 to facilitate the paid up pension rights and entitlements in respect of a previous employer's occupational pension scheme to be transferred without having to go to another employer's occupational pension scheme • Retirement Annuity Contracts (RACs) are a type of individual pension plan available before 1 July 1988, before the current form of Personal Pension Plan (PPP) was introduced. RACs were available to employed individuals (where there was no company pension scheme available) and to those in self-employment, provided they had earnings subject to UK taxation Appendix II - Trusts This aim of this document is to answer the most frequently asked questions in respect of Trusts and should be read in conjunction with the suitability report which summarises the recommendations your Financial Adviser has made based on your individual circumstances. It should not be viewed as an exhaustive summary of what can be a complex area of law - You should always seek guidance from your Financial Adviser. Q1. What is a trust? A Trust is an obligation binding a person ('trustee') to deal with property on particular terms for the benefit of another person or persons (the beneficiary or beneficiaries). A trust is usually created in writing (via a trust deed or a will), or may be imposed by statute (for example where a legacy is left to a minor) Settlor The settlor is the person who creates the trust and puts assets into it at the start. The trust deed (or will) will state how the trust capital and income may be used. Trustee(s) The trustees are the legal owners of the trust property and may only deal with the trust property in accordance with the terms of the trust. Beneficiaries The beneficiary (or beneficiaries) are the individual(s) who can benefit under the terms of the trust. The trust may given certain rights to particular beneficiaries (e.g.- a right to income generated by the trust property) or it may give no rights to entitlement but grant power to the trustees to exercise their discretion with regards to who benefits and in what proportions. Q2. Can I take money back from the Trust if I need it in the future? No. In order to make sure the Trust is not included as part of your estate for Inheritance Tax purposes it is essential that your are excluded from benefitting from it. The terms of the trust will specifically state that the settlor be excluded as a beneficiary. Q3. What is an "interest in posession" An "interest in possession" is a right that a beneficiary currently has to something from the trust. This may be: (a) a right to income generated by the trust property; or (b) a right to both the income and the trust property itself Q4. What types of Trust are there? Strictly speaking, all trusts fall into one of two categories - Trusts with an 'interest in possession' or trusts without an 'interest in possession' (see Q2 above) but can be split down further into the following: Bare Trust A bare trust (or 'simple' trust) is a trust under which the beneficiary has an absolute right to the trust property (and income). Provided the beneficiary has reached the age of majority he/she can take personal possession of the trust property. Bare trusts are commonly used to pass assets to children. A Bare Trust is the least flexible trust as the trustees have no discretion over who can benefit - The role of the trustee is simply to look after the trust assets until the beneficiary takes possession. Interest in Possession (IIP)Trust Although strictly speaking a bare trust is also a type of IIP trust (see Q3), the term is more commonly used to describe trusts where one beneficiary has a right to trust income during their lifetime (known as a life interest) but someone else is entitled to the residual trust fund on their death. The person entitled to the trust fund after the death of the IIP holder is known as the remainderman and is said to have an 'interest in residue' Discretionary Trust Under a discretionary trust no beneficiaries have an automatic right to either trust income or capital The trustees decide how much of either (if any) to pass on to each of the beneficiaries. This type of trust offers the most flexibility and can enable you to retain some control during your lifetime as to who benefits and when. Q5. What is a Flexible Power of Appointment Trust? This is essentially a type of "interest in possession" trust - Under the terms of the trust the nominated beneficiares (usually described as the 'default' beneficiaries) initially have the right to both the income and capital from the trust. The trust, however, will also have a class of 'potential beneficiaries' to whom trustees can appoint capital or income under their 'power of appointment'. As the default beneficiaries rights can therefore be defeated by the trustees they do not have an absolute entitlement (like a bare trust) but, in the absence of any action by the trustees, hold the current interest in the trust. Q6. How is the trust income treated for income tax purposes? "Interest in Possession" Trusts Under an IIP trust the trustees are liable for tax at 10% on dividends and 20% on other income generated by the trust property. The beneficiary holding the IIP - as they hold the right to this income may then be liable for further tax on this income (or be able to reclaim some or all of the tax) depending on their own tax position. NB. Parental settlement rules: There are special rules to prevent tax avoidance by individuals. Broadly this means that income arising from trusts created by parents for their children will be taxed as the parent's income if it exceeds £100 per year. Trusts without an 'interest in possession' For discretionary trusts (non-interest in possession trusts), the trustees are liable for tax on the first £1,000 of income at rates of 10% (dividend income) and 20% for other income. In 2010/11 and 2011/12, for income in excess of £1,000 tax is levied at a rate of 42.5% on dividend income and 50% on other income. Where the trust income is 'rolled up' within the trust there are no further issues. Where the income is paid out to a beneficiary the position can more complicated where the income is derived from dividends - beneficiaries may end up with less net income when compared to a dividend they might receive from an investment held personally. Trust taxation is a complex area and if you are unsure of the position you should query this with your Financial Adviser. Q7. How are trust capital gains treated for capital gains tax purposes? Under a bare trust any capital gains made on disposal of trust assets are treated as the beneficiary's (as the trust fund is essentially theirs). For other trusts any capital gains are generally taxed as the trustee's. Individuals can realise capital gains of up to the annual CGT exemption (£10,600 for tax year 2011/12) without having to pay capital gains tax. The trust exemption is equal to half the individual annual exemption (£5,300 for tax year 2011/12). However, where a settlor has created more than one trust then the trust exemption is divided by the number of trusts, subject to a minimum of 1/5th of this. For disposals made after 22 June 2010 trustees pay capital gains tax at a rate of 28% on capital gains in excess of their available annual exemption. Q8. How are transfers (gifts) to Trusts treated for Inheritance tax purposes? For lifetime transfers to most Trusts made on or after 22 March 2006, to the extent the transfer is not an exempt transfer, it will be treated as a Chargeable Lifetime Transfer. Where such a transfer plus previous chargeable lifetime transfers made in the preceding 7 years exceeds the nil rate band then IHT will be payable on the excess at the lifetime rate of 20%. The only exceptions to this are lifetime transfers to Bare Trusts or Trusts for the Disabled which are treated as Potentially Exempt Transfers. Please see Appendix I for details on how lifetime transfers are treated for IHT Q9. Are there any other Inheritance Tax implications of using Trusts? Yes, but only in respect of trusts classed as "relevant property" trusts There may also be Inheritance Tax charges levied on the Trust itself when capital (not income) is paid out to beneficiaries and also based on its value every ten years. This applies equally to 'relevant property' trusts created during lifetime or trusts created on death (e.g. - created by a will or on intestacy) Periodic charge There may be IHT payable every 10 years if the value of the Trust exceeds the nil rate band applicable at the time - The charge equates to a maximum of 6% of the trust assets over the nil rate band. In calculating this, however, certain gifts made in the 7 years prior to the trust being established may also need be added to the value of the trust. 'Exit' charge There may be an IHT charge if capital leaves the trust between each 10 year trust anniversary. During the first 10 years, where IHT was paid at the time of the original gift, then further tax may be due based on:(i) the 'effective rate' of inheritance tax originally paid on the gift; (ii) the number of complete 3 month periods since the trust was established; (iii) the amount leaving the trust For capital leaving the trust between subsequent decennial (10 year) anniversaries then the situation is as above but the exit charge is based on the 'effective rate' of the periodic charge levied at the last 10 yearly anniversary date. If there has been no IHT payable at the time of the original gift (for capital payments between years 0 - 10) or any IHT due at the last decennial anniversary (for capital payments between subsequent anniversaries) then there will be no exit charge due Q10. What is a "relevant property" trust? From 22 March 2006 most Trusts set up during lifetime and on death are "relevant property" trusts The exceptions are: (i) Bare trusts (ii) Trusts for the Disabled - Such a beneficiary is deemed to hold a Disabled Persons Interests (DPI) (iii) Trusts created on death for a minor child of the deceased provided the beneficiary becomes absolutely entitled to the trust assets at age 18 (A Bereaved Minor's Trust). (iv) Trusts set up by a will where the beneficiary's entitlement commences immediately on the death of the person who wrote the will. This type of beneficiary's interest is known as an Immediate Post Death Interest (IPDI) There are also transitional rules for "interest in possession" trusts established prior to 22 March 2006 that could have otherwise inadvertantly been brought under the "relevant property" rules - These are know as Transitional Serial Interests (TSI) Q11. How are gains from investment bonds written in trust taxed? Where a chargeable event occurs in respect of an investment bond or capital redemption bond a chargeable gain may occur. The circumstances in which a chargeable event occurs can be: • Death of the last life assured (not applicable to capital redemption bonds as these have no element of life assurance) • Surrender • Assignment for money or money's worth • Certain part surrenders In respect of part surrenders up to 5% of the premiums invested can be withdrawn each policy year until 100% of the premium(s) have been withdrawn) without triggering a chargeable event. If this 5% allowance is unused in a policy year then it can be carried forward for use in future years. If 5% is taken each year then after 20 years any further withdrawals will be fully taxable. In respect of investment bonds subject to a trust the general rule is that, where the settlor (the person who created the trust) is alive and UK resident for tax purposes then the gain will be treated as the settlor's. Where the settlor is deceased then the gain will be assessed against the trustees who are liable for tax on the gain at the rate applicable to trusts (50% in 2010/11 and 2011/12). Where the gain arises from a UK investment bond then this is already deemed to have been subject to 20% tax so trustees would have a liability to a further 30% Where a chargeable gain arises in respect of an investment bond (or capital redemption bond) held subject to a bare trust and the beneficiaries are over 18 then the gain will be assessed as that of the beneficiaries. Appendix III:- Inheritance Tax Planning Schemes This aim of this document is to answer the most frequently asked questions in respect of the various IHT planning solutions available and should be read in conjunction with the suitability report which summarises the recommendations your Financial Adviser has made based on your individual circumstances. It should not be viewed as an exhaustive summary of all the technical details - You should always seek guidance from your Financial Adviser Q1. What is a Discounted Gift Trust? A Discounted Gift Trust is a special trust-based scheme. It is designed for individuals who have a lump sum to invest, wishes to make a lifetime gift, and has a need for regular income/payments in the future. The settlor transfers a lump sum to the arrangement under the terms of which the settlor reserves rights to receive certain future payments from the trust and gives away the balance. The arrangement will usually be a single premium investment bond or capital redemption policy written subject to this special trust. At first glance it may seem that the settlor would be making a 'gift with reservation' (see Appendix I) but the arrangement is carefully structured to ensure that either:(i) Where the settlors rights derive from the policy itself, the rights that the settlor is retaining from it are distinct from the benefits he/she is giving away - For example, the settor retains the right to maturity payments if alive at that date but gifts away the death benefits of the plan. Although both derive from same investment this distinction is important - This is generally known as a "carve-out" scheme as the settlor has carved out certain rights for him/herself and gifted the others. or; (ii) The settlor's rights are to cash payments from the trust rather than from specific rights in respect of the underlying policy - In this respect, therefore, the settlor is not reserving a benefit directly in the gifted policy. This is usually referred to as a "reversionary" scheme At outset the settlor must decide on the annual future payment's he/she is reserving a right to - Based on this, their age, and actuarial life expectancy a "notional" capital value can be placed on these future entitlements. The difference between the amount invested and the retained rights (the 'discount') is the "discounted" gift being made to trust for the nominated beneficiaries. The immediate effect should be that the settlor's estate is reduced immediately for IHT purposes by the value of the "discount". There will be no IHT due on the balance - the discounted gift - on death provided the settlor survives for 7 years. It is essential, however, that the arrangement is underwritten by the insurer to take into account any medical factors. This is because most insurers have agreed with HM Revenue and Customs (HMRC) the basis for calculating discounts and therefore the 'discount' is less likely to be disputed by them if death occurs within 7 years (provided full disclosure of all relevant health matters was made by the applicant). You should be aware, however, that there is never a guarantee that HM Revenue and Customs will accept a certified discount. Discounted Gift Arrangments can be based around bare trusts, flexible trusts, or discretionary trusts The choice will depend on the level of flexibility required over who can benefit from the gifted element and also taxation considerations. The discounted gift will be treated as either a Chargeable Lifetime Transfer or a Potentially Exempt Transfer (Please refer to Appendix I and II for further information) Q2. What are the Inheritance Tax implications of investments made into a Discounted Gift Trust? For schemes based around a bare trust the amount invested less the value of the settlor's retained rights (the 'discount') will be a Potentially Exempt Transfer. The settlor's estate should be reduced immediately by the discount and the there will no IHT to pay on the remaining gift provided the settlor lives for 7 years. For schemes based around flexible or discretionary trusts the amount invested less the value of the settlor's retained rights (the 'discount') will be a Chargeable Lifetime Transfer. The settlor's estate should be reduced immediately by the discount There may be IHT payable at the lifetime rate of 20% where the value of the discounted gift plus chargeable lifetime transfers made in the previous 7 years exceed the nil rate band. Provided the settlor lives for 7 years from the date of the gift then no further IHT will be due on death. Q3. How is the Discounted Gift Trust itself treated for Inheritance Tax? This depends on which version of the Discounted Gift Trust is used - Those that are based around bare trusts will not be classed as "relevant property" trusts and therefore no exit or periodic IHT charges will apply. For Discounted Gift Trusts based around flexible or discretionary trusts the "relevant property" rules will apply - These are explained further in Appendix II The value of the Discounted Gift Trust every decennial anniversary for the purposes of the periodic charge will be the value of the investment bond less the value of the settlor's future rights - This means that the capital value of these future rights need to be recalculated at each decennial anniversary to reflect the settlor is 10 years older Q4. What is a Loan Trust? A loan trust is a generic name given to an trust-based scheme where, instead of making a lifetime gift into the trust, the settlor makes an interest-free loan to the trustees which is repayable on demand. The trustees will then use the money to invest in a single premium bond The settlor and trustees will also sign a seperate loan agreement detailing the terms of the loan Under the arrangement the settlor is only entitled to receive back the amount of any outstanding loan and any investment growth will be held on trust for the beneficiaries. The usual practice is that the settlor requests regular repayments of the loan which the trustees fund be taking withdrawals from the bond (usually up to a maximum of 5% per year to avoid income tax implications in respect of the investment). This type of arrangement may therefore be appropriate where the settlor needs a regular 'income' stream - For example, where annual repayments of 5% of the loan are taken the outstanding loan will be repaid after 20 years and, if investment growth has been sufficient to sustain these withdrawals, then an amount equivalent to the original loan will be held on trust for the beneficiaries. The arrangement may also be appropriate for an individual who requires ad-hoc access to the initial capital but wants to ensure any investment growth accrues outside their taxable estate. On death any outstanding balance of the loan will form part of the settlor's estate for IHT purposes (as this is a debt owed to his/her estate). It is also important to remember that once the loan has been repaid the settlor will receive no further payments from the arrangement. Again the type of trust used can be a bare trust, flexible trust, or discretionary trust. Some arrangements may also require the settlor to make a nominal gift (say £10) to set up the trust - known as Gift and Loan Trusts - whereas others do not and are simply loan-based. Q5. What are the Inheritance Tax implications of using a loan trust scheme? As the initial amount provided is a loan rather than a gift there are no immediate IHT implications on setting up the arrangement. Where the loan trust is based around a bare trust the 'relevant property' rules will not be applicable and there will be no possibility of exit or periodic IHT charges being levied on the Trust (See Appendix II for an explanation of the relevant property rules) Where the loan trust is based around a flexible or discretionary trust then the 'relevant property' rules will apply - There will be no exit charges on capital leaving the trust during the first 10 years, however, as there was no transfer of value (gift) at outset. For the purposes of the periodic charge the value of the Trust at each decennial anniversary will be the value of the investment bond less the outstanding loan to the settlor - For this reason the chance of a periodic charge on the first decennial anniversary is minimal Q6. Why should I consider effecting life assurance in trust to provide the funds for my beneficiaries to pay the IHT? Surely it is better to use schemes that reduce the value of my estate than pay out money into a policy? This will depend on your circumstances - It is important to remember that with any lump-sum IHT scheme you will be giving up access to either some or all of the initial amount invested, the investment growth, or even both and therefore lump- sum IHT schemes are not without consequence. Effecting suitable life assurance in trust is perhaps the most simple solution and, for those who have excess disposable income, then can be a useful way of 'gifting' this income to your beneficiaries rather than allowing it to build up within your estate and itself be subject to Inheritance Tax. Q7. What are the IHT implications in respect of effecting life assurance in trust? The premiums will be gifts for inheritance tax purposes. Providing they are paid out of income as part of your regular expenditure (and do not affect your standard of living) then they should be exempt under the "normal expenditure out of income provisions" Where the life policy is written subject to either a flexible or discretionary trust then the trust will be subject to the "relevant property" rules. Generally, however a life policy has little or no current value (as it only has a value on death) therefore there is unlikley to be a periodic charge at each decennial anniversary - The main scenario where such a charge could apply, however, is where the life assured is in serious ill health as the policy could then be deemed to have a "market value" Where the lifecover required is significant, it is also possible to establish a series of smaller policies in seperate trusts (established on seperate days - this is essential) in preference to a single policy in trust - The aim of this is to reduce the likelihood of a periodic charge in the instance mentioned above. This is often referred to as the Rysaffe principle (after the case of Rysaffe Trustee Co (CI) v IRC which established this precedent) Q8. What is a Gift Inter-Vivos Plan? A Gift Inter Vivos Plan is a 7 year life assurance policy designed to cover any inheritance tax due on a lifetime gift (inter-vivos simply means "between the living"). The sum assured reduces over the period to mirror the actual amount of IHT that could be due on the transfer. Q9. What is a spousal-by pass trust? The term is commonly used to describe an trust arrangement set up to receive any death benefits from an unvested pension scheme (although technically the term can apply to a trust set up to receive any asset(s)). A spousal by-pass trust is usually set up as a discretionary trust which will allow the trustees to make ad-hoc payments of income or capital to a range of beneficiaries, including your spouse so that he/she can still benefit from the lump sum. It is possible, however, to set this up as an 'interest in possession' trust with the spouse noted as a discretionary beneficiary. There may be a periodic IHT charge based on the value of the trust assets at each decennial anniversary, although it is important to note that the anniversary dates will run from the date the deceased member joined the pension scheme rather than the date that the spousal-by pass trust was established - The reason for this is that there are rules governing transfers from one settlement (trust) to another and where funds from one settlement become comprised in another they are treated as still being comprised in the original settlement for the purposes of the 'relevant property' IHT regime. As pension death benefits are already written in trust at outset (i.e - when the member joins the scheme), on death the scheme trustees would be deemed to be transferring funds from the existing pension trust to the spousal by-pass trust Appendix IV - Intestacy Rules (England and Wales) This aim of this document is to explain the Law of Intestacy (England and Wales). Different rules apply in Scotland and in Northern Ireland. You should always seek guidance from your Financial Adviser if you have any doubts with regards to the relevance of this document to you individual circumstances. The Intestacy rules will apply if someone dies without making a will. People who have not made a will are said to have died 'intestate'. If this happens, the law sets out who should deal with the deceased's affairs and who should inherit their estate. 1. Spouse - but no issue, no parent(s), no brother or sister of the whole blood, or issue of brother or sister of the whole blood Spouse takes the whole estate absolutely 2. Spouse and issue Spouse takes:(i) All the chattels (ii) £250,000 absolutely (known as the statutory legacy) plus 6% interest from date of death to date of payment (iii) A life interest in half the residue (i.e. - a right to income) with the remainder to the children Issue takes the remainder of the residuary estate and, if more than one in equal shares, subject to 'statutory trust' provisions - Broadly the statutory trusts are relevant where issue is below the age of majority and their terms provide that the issue attains an absolute right to income and capital at age 18. Where the issue of the deceased are adults they will take their proportionate legacy immediately. 3. Spouse, no issue but other relatives Spouse takes:(i) All the chattels (ii) £450,000 absolutely (the statutory legacy) (iii) The balance of half the residue absolutely Relatives take the remainder in the following order of priority:(i) Parents (and if more than one in equal shares) (ii) Brothers and sisters (or if themselves deceased, their issue) in equal shares per stirpes 4. Issue but no spouse Issue take the entire estate absolutely 5. No spouse or issue If there is no spouse or issue then the whole estate is taken by other specified relatives in the following order of priority: • Parents • Brothers and sisters of the whole blood • Brothers and sisters of the half blood • Grandparents • Uncles and Aunts of the whole blood • Uncles and Aunts of the half blood • Crown "Per stirpes": This term means that each child takes an equal share and, if the child predeceases the intestate then his/her entitlement is split equally between his/her children equally and so on
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